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Employer Exclusion Article WHOSE EMPLOYEE IS IT? OR DOES IT MATTER? THE BATTLE OVER COVERAGE AND THE EMPLOYER EXCLUSION Jay Barry Harris is a Shareholder and Hema Patel Mehta is an Associate with Fineman Krekstein & Harris, P.C. Their practice focuses upon insurance coverage litigation, trucking litigation, employment law, premises liability, product liability, construction law and professional liability. Mr. Harris is a former member of the DRI Board of Directors and chair of the Trucking Law Committee and member of the Insurance Law Committee. Mr. Harris is also a member of the International Association of Defense Counsel, Philadelphia Association of Defense Counsel, Pennsylvania Defense Institute, American Board of Trial Advocates and Federation of Defense & Corporate Counsel. INTRODUCTION An employers liability exclusion typically excludes coverage for injuries arising out of the employment relationship. A common question courts must resolve is whether the exclusionary clause applies only to employees of the named insured or to employees of additional insureds as well. From 1967 to 2015, Pennsylvania courts held that this exclusion served to bar coverage not only to an insured for claims of bodily injury by its own employees, but also to an additional insured under the same policy, even though it did not employ the injured party. Until recently, the Pennsylvania Supreme Court had not addressed the viability of its rule in light of the clearer, more specific severability clauses appearing in insurance contracts. Last year the Supreme Court of Pennsylvania changed direction on the employers liability exclusion in a commercial general liability policy and effectively overruled its 48 year old decision. In Mutual Benefit Insurance Company v. Politsopoulos, the court refused expansive construction of the term “the insured” to be equivalent to “any insured” in an employers liability exclusion. ARTICLE Commercial General Liability policies typically contain what is commonly referred to as the “employers liability exclusion” for injuries arising out of the employment relationship. The language of the exclusion generally provides that the policy does not apply to “bodily injury” sustained by an “employee” of the insured arising out of or in the course of employment or while performing duties related to the insured’s business, whether the insured may be liable as an employer or in any other capacity. This exclusion seeks to preclude coverage for injuries “to any employee of the insured arising out of and in the course of their employment by the insured . .” Some courts interpret this language as excluding all employment-related claims. Other courts, however, rule that this exclusion only bars coverage for employment-related claims that are covered under the applicable state workers’ compensation laws. {01072489;v1} The basic purpose of the exclusion is to prevent a commercial general liability policy from being converted into an employers liability insurance policy, and to avoid duplication of coverage typically provided by a workers’ compensation and/or employers liability policies. Workers’ compensation policies provide coverage for the insured’s statutory liability under state and federal workers’ compensation laws, while employers liability policies are typically broad based and designed to cover defense costs and provide indemnity for virtually any employment based tort liability. Further, employers can secure a third-party coverage endorsement, for example an additional insured endorsement, to expand coverage to protect against legal actions asserted by third parties, such as vendors and/or customers. The primary issue that courts grapple with in these cases is whether the alleged wrong was sufficiently related to the “employment relationship” to come within the scope of the exclusion. In order for the employers liability exclusion to apply, the claim against the insured must involve bodily injury to an “employee.” A common question courts must resolve is whether the exclusionary clause applies only to employees of the named insured or to employees of additional insureds as well. Courts addressing the issue often resort to analyzing the policy’s severability clause, which operates to extend coverage “separately to each insured who is seeking coverage or against whom a claim or suit is brought.” The severability clause has been construed to impact the meaning of “the insured” in the employers liability exclusion. A majority of jurisdictions considering the issue, reason that the severability clause’s separation of coverage requires the term “the insured” to be read as that insured seeking coverage. Under this interpretation, the exclusion does not apply to bar coverage for an additional insured where the injured claimant was employed by the named insured; that is, the exclusion is triggered only by an employee’s claim against his or her insured employer. For example, courts applying New Jersey law limit the employee exclusion to the actual employer only where the exclusion refers to “any employee of the insured arising out of and in the course of his employment by the insured . .” Michael Carbone, Inc. v. General Accident Ins. Co., 937 F. Supp. 413, 418 (E.D. Pa. 1996) (emphasis added) (applying New Jersey law and citing Maryland Casualty Co. v. New Jersey Manufacturers Casualty Ins. Co., 145 A.2d 15 (N.J. 1958) and Erdo v. Torcon Construction Co., 275 N.J. Super. 117, 645 A.2d 806 (App. Div. 1994)). These cases look to the separation of insureds clause in supporting that conclusion. A minority of jurisdictions, however, read identical provisions and arrived at the opposite conclusion: that “the insured” refers to “any insured.” See Northland Ins. Co. v. Zurich Am. Ins. Co., 743 N.W.2d at 150 (S.D. ); Hancock v. Tri-State Ins. Co., 858 S.W.2d 152, 154–55 (Ark. Ct. App. 1993) (holding that “the insured” always includes the named insured, even when it is not the insured party seeking coverage); and Travelers Ins. Co. v. Am. Cas. Co., 441 P.2d 177, 180 (Mont. 1968) (“The issue has been around for many years. If the industry intended the construction [that the exclusion could operate to provide more coverage to an additional insured than a named insured] … the addition of two words, ‘claiming coverage,’ would have made it clear.”). {01072489;v1} Until recently, Pennsylvania case law took the minority approach in the additional insured context, holding that this exclusion served to bar coverage not only to an insured for claims of bodily injury by its own employees, but also to an additional insured under the same policy, even though it did not employ the injured party. This is so despite the use of the phrase “the insured” (suggesting that the exclusion applies only with respect to bodily injuries suffered by employees of the specific insured whose rights are at issue) as opposed to the phrase “any insured” (which might support a denial of coverage if the claimant were an employee of any party qualifying as an insured under the policy). There is a line of cases that is seemingly dictated by the Pennsylvania Supreme Court’s 40-year-old decision Pennsylvania Manufacturers’ Association Insurance Co. v. Aetna Casualty & Surety Insurance Co., 233 A.2d 548 (Pa. 1967) (“PMA”). These cases involved the interaction between the older standard form language of the employers liability exclusion, which excluded “‘Bodily Injury’ to: (1) An employee of the insured arising out of and in the course of: (a) Employment by the insured; or (b) Performing duties related to the conduct of the insured’s business…”, (emphases added) and the separation of insureds provision. The critical issue in these cases was that the employers liability exclusion used the language “employee of the insured.” Insureds who were not the actual employer of the injured party argued that the exclusion should not apply to them because they were not the employer and they should be treated distinctly under the separation of insureds clause as a result. In PMA, the Court rejected this argument, and found that the language “the insured” covered both employers of the injured parties, as well as non-employer insureds. Specifically, in PMA, PMA insured Harry B. Niehaus, Jr., pursuant to a standard automobile injury liability policy as well as a separate workers’ compensation policy. Harry B. Niehaus, Jr. operated a business in which his employees, in the ordinary course of his business, operated vehicles owned by Niehaus. Aetna, in turn, insured Delaware Wool Scouring Company under a comprehensive bodily injury policy. A Niehaus employee, while acting in the course of his employment, drove a Niehaus truck to the premises of Delaware Valley. A Delaware Valley employee, in the course of unloading the Niehaus truck, negligently operated a forklift, thereby injuring the Niehaus employee. The Neihaus employee sued Delaware Valley. The question the court addressed was whether Delaware Valley was covered by Niehaus’ insurance or its own insurance. Aetna insured Delaware Valley for comprehensive bodily injury liability, however, its policy provided that if Delaware had other insurance against the loss covered by Aetna’s policy, the Aetna policy would only provide excess insurance coverage if the loss arose out of the use of any non-owned vehicle. The PMA policy contained an employee exclusion which provided that the policy did not apply to bodily injury of any employee of the insured. The policy also included a separation of insureds clause which provided that the term “the insured” should be used severally and not collectively. {01072489;v1} The parties agreed that the PMA policy would apply unless the employers liability exclusion in the PMA policy excluded coverage for bodily injury to a Niehaus employee. Aetna argued that the term “the insured” in the employers liability exclusion meant the insured claiming coverage, e.g. Delaware Valley. Since the injured party was not an employee of Delaware Valley, the employers liability exclusion in the PMA policy would not apply and, therefore, PMA’s policy would apply.
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